An Operating Agreement is a contract drafted, and agreed to, by the members of an LLC that lays out the rules for how the business is going to operate. Operating Agreements are not required under state law, but are very helpful and we highly recommend them to our clients in any multi-member LLC scenario. Here are four reasons why.
Death of a Member
It is wise to consider what would happen if a Member dies. You probably did not enter into business with the expectation that your partner’s spouse would someday be your business partner. Nor would you want to continue to pay your partner’s estate for many years if he/she is no longer participating in the business. You can address the mechanics of these issues in advance in an operating agreement.
Everything seems great today, but at some point, you will have disagreements with your business partner(s). An operating agreement can set forth how disagreements between and among members will be resolved. Setting these rules now can save the business a lot of time, energy, and stress down the road.
An operating agreement can anticipate for the future growth and structure of your business with enough flexibility to permit it to happen without changing the management or voting structure. Importantly, if your business needs an infusion of capital someday, then the founding Members can agree now on the terms that would apply to future investors in the business.
Clarify Management Expectations
The operating agreement can clarify who is in charge of running the business, and for handling issues such as accounting, allocations of profit and loss, dispute resolution, signing contracts, and the many other issues to ensure that every participant understands their role and who is doing what.
Joe received his law degree from the University of North Carolina–Chapel Hill School of Law and his Accounting degree from the University of Rhode Island. He is admitted to practice law in Connecticut, Massachusetts, and Rhode Island, and he is a CPA. He is an Adjunct Professor and lecturer at the University level and has been a frequent speaker on business planning and legal matters.